FXStreet (Córdoba) - The UBS analyst team revised their USD/CAD three-, six-, and 12-month forecasts to 1.44, 1.38 and 1.34, respectively following yesterday's Bank of Canada decision to stay on hold. Key Quotes “The USD/CAD exchange rate is currently influenced by a number of negative external factors, which are likely to keep the pair elevated in coming months. We therefore cannot rule out USD/CAD trading at 1.50. However, as we expect a normalization over time, an exchange rate below 1.40 can be expected.” “Looking at the purchasing power parity (PPP), it currently tells us that the longer-term anchor for the pair should be around 1.20. Clearly oil prices at 13 year lows and a diverging monetary policy between the US and Canada do not justify a 1.20 level at this very moment. However, a current valuation-gap of 22%, which is the most extreme valuation since our series begins in 1982, should tell us that extreme levels have been reached. So far the most extreme valuation showed an 18% gap in 2001.” “With oil prices possibly touching 20 USD/bbl or lower in the very short term, we cannot rule out USD/CAD levels above 1.50. However, with our forecast for oil prices to stabilize and turn higher as the year progresses, a medium-term forecast below 1.40 seems sensible." "On top of that, the clearly weaker Canadian dollar has helped inflation to stay around the BoC target and the non-commodity related economy to profit from stronger exports. We therefore believe that markets have become too bearish on the Bank of Canada and its divergence to the US Federal Reserve. The reaction function of the BoC could be seen at their January meeting. A weaker CAD reduces the need for a rate cut – as it supports inflation – while a much stronger CAD in the current environment would have made a rate cut more likely. But the BoC itself is unlikely to push the CAD much lower from here. On the other hand, if global circumstances warrant another rate cut by the BoC, rate hikes by the Fed will also get less likely, balancing out the monetary policy for the currency pair.” For more information, read our latest forex news.